ECB's de Guindos: Current interest rate is appropriate
European Central Bank (ECB) Vice President Luis de Guindos said on Wednesday that the current interest rate is appropriate based on inflation developments and our projections and the transmission of monetary policy.
Key quotes
The current interest rate is appropriate based on inflation developments, our projections and the transmission of monetary policy.
We are living in a very complex and uncertain world with numerous risks.
Despite rising real incomes, consumption remains subdued. Maybe because households fear higher taxes in the future.
Markets are not always wrong, but they are not always right either.
Thursday decision was unanimous.
We all agree we must keep all options open.
If the situation changes, we will adjust out stance accordingly.
An independent central bank is the best protection against high inflation.
Inflation expectations only stay low if investors and consumers trust the central bank to keep prices stable.
It's particularly critical if monetary policy is constrained by fiscal policy - what we can fiscal dominance.
Market reaction
At the time of writing, the EUR/USD pair is trading 0.12% lower on the day at 1.1852.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
